Insolvent firms risk being delisted under proposed NSE trading rules

Some of the insolvent or financially distressed companies at the Nairobi Securities Exchange (NSE) #ticker:NSE risk being delisted if far-reaching changes to the rules are adopted.

The Capital Markets Authority (CMA) and the NSE Wednesday released the proposed listing rules that will see the struggling firms put under a recovery board and given three years to complete a turnaround or be expelled from the Nairobi bourse altogether.

The recovery board will accommodate firms struggling with negative working capital — where short-term assets fall short of short-term liabilities — a position that has made it difficult for them to pay their short-term debt and meet routine financial obligations.

The recovery board is also expected to alert investors at the NSE of companies in which they should trade with caution when buying shares.

The proposal is aimed at helping especially retail investors make informed decisions before buying stocks.

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“The Exchange shall compulsorily delist an issuer who is placed on the recovery board of a market segment if the issuer… after the expiry of a three-year period on the recovery board has not met the net assets and insolvency requirements,” say the proposed changes to listing rules.

Failure to submit a recovery plan within six months of being placed on the recovery board or failing to show progress reports of the restructuring plan will also earn a firm expulsion from the NSE.

Investors trading in firms that have been moved to the recovery board will be advised to trade with caution and be aware that they are dealing with firms in trouble.

Hong Kong and India have similar boards to put listed firms that do not fit on the main board to ensure key investor protection measures are maintained.

“In order to enhance investor protection, the Exchange and the authority are jointly proposing the establishment of a recovery board at the exchange on which securities of an issuer who is technically insolvent, non-compliant with any other listing obligation or whose operations are being conducted in a manner that is prejudicial,” the NSE said in a notice.

A poor run by companies at the NSE has turned most counters into penny stocks, wiping out billions of shillings of shareholder wealth.

One third of the counters — 23 firms — are trading at less than Sh10 out of which four are less than Sh1 as their value and confidence in the market are eroded. And four companies, including Mumias and Uchumi, are trading at less than Sh1 a share.

If the rules are implemented, the NSE and the market regulator will form an advisory board to help shepherd the recovery of the troubled counters while they take a timeout at the recovery trading segment.

The plan to create the special trading platform for troubled listed firms was designed after it emerged that outright delisting could create a confidence crisis in the capital markets and send the wrong signals to potential investors.

The rehabilitation is expected to help the distressed firms get back on their feet.